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VGT vs QQQ: Which is the better ETF?

VGT and QQQ are two highly concentrated ETFs in the information technology sector.

VGT is an ETF dedicated to the information technology sectors, with the aim of tracking its performance using an index. On the other hand, QQQ tracks the Nasdaq 100 and has a high concentration in the information technology sector.

But which of these two is right for you?

In this post, we’ll compare VGT and QQQ’s diversification, expense ratio, tax efficiency, and performance to help you decide.

 

What is VGT?

VGT is the Vanguard Information Technology ETF. This ETF tracks the performance of the information technology sector. To do this, it uses the Information Technology Spliced Idx index.

VGT is a passively managed fund that follows a full-replication strategy. The fund also invests in companies that serve the electronics and computer industries or those that manufacture products based on the latest science. As a result, there are certain stocks and companies that aren’t considered directly a part of the information technology sector.

 

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What is QQQ?

QQQ ETF or QQQ is an exchange-traded fund offered by Invesco. It aims to generate results similar to the Nasdaq 100.

The Nasdaq 100 index tracks the top 100 stocks on the Nasdaq stock exchange, excluding any companies in the financial sector. The QQQ ETF is managed to match the Nasdaq 100 index, rebalancing quarterly and reconstituting annually.

 

VGT vs QQQ

VGTQQQEdge
Fund TypeETFETFSplit Decision
DiversificationInformation Technology Spliced IdxNasdaq 100QQQ
Inception Date20041999QQQ
Number of Holdings318101VGT
Minimum Investment$1.00$1.00Tie
Expense Ratio0.10%0.20%VGT
Tax EfficiencyETFs are generally are more tax efficientETFs are generally are more tax efficientTie
Tax Loss HarvestingFunds must settle and may need 1-2 days to be available for reinvestmentFunds must settle and may need 1-2 days to be available for reinvestmentTie
Trading & LiquidityDaily trading during Market HoursDaily trading during Market HoursTie
Performance-20.67% in 2022-32.58 in 2022VGT
Dividend Yield0.76% in 20230.64% in 2023Slight advantage to VGT

 

Diversification – QQQ

VGT and QQQ are two ETFs with different investment strategies.

VGT aims to track the performance of the Information technology sector. On the other hand, QQQ aims to track the performance of the Nasdaq 100.

These two ETFs are often compared because they invest much of their portfolio in the information technology sector. At the same time, this is not intentional for QQQ; the composition of the Nasdaq 100 Index results in this composition for QQQ.

The table below shows that nearly all of the VGT portfolio is invested in the technology sector. In contrast, QQQ invests 50% in the information technology sector, with some diversification among two key sectors: communication services and consumer discretionary.

Next, let’s examine the table below, which shows the top 10 holdings for each ETF.

IndustryVGTQQQDifference
Information Technology99.35%50.41%48.94%
Communication Services0.19%15.77%-15.58%
Consumer Discretionary0.00%13.80%-13.80%
Health Care0.01%6.46%-6.45%
Consumer Stables0.00%6.28%-6.28%
Industrials0.33%4.76%-4.43%
Utilities0.00%1.24%-1.24%
Energy0.00%0.52%-0.52%
Financials0.10%0.49%-0.39%
Real Estate0.00%0.27%-0.27%

From the table above, we can see that VGT is more concentrated in the top 10 holdings than QQQ. The top 10 holdings in VGT account for 60%, while for QQQ, the top 10 holdings account for 50%.

The table below shows the top 10 holdings for each ETF. We can see that VGT is more concentrated in the top 10 holdings than QQQ. The top 10 holdings in VGT account for 60%, while for QQQ, the top 10 holdings account for 50%.

CompanyVGTQQQ
Apple Inc.21.58%11.16%
Microsoft Corp.18.59%10.48%
Amazon.com Inc.5.68%
NVIDIA Corp5.89%4.54%
Meta Platforms Inc Class A3.91%
Broadcom Inc3.28%3.16%
Alphabet Inc Class A3.02%
Alphabet Inc Class C2.99%
Tesla Inc2.61%
Adobe Inc2.38%2.21%
Cisco Systems Inc2.01%
Salesforce Inc1.88%
Accenture Plc Class A1.76%
Oracle Corp1.58%
Advanced Micro Devices1.49%
Total60.44%49.76%

Overall, neither of these ETFs is very diversified among the top 10 holdings. Both ETFs hold a large weight between Apple and Microsoft. QQQ holds approximately 22%, while VGT holds 40%.

Athough VGT has more holdings, the portfolio is less diversified. QQQ has fewer holdings, but the top 10 holdings are more diversified, and the overall portfolio is more diversified across different sectors.

 

Minimum Investment – Tie

VGT and QQQ have investment minimums of $1. Both of these funds are highly accessible to investors and available by many brokerage firms, making them easy to invest in. Both funds are also ideal for any investment level.

 

Expense Ratio – Advantage to SPY

Expense ratios are important because they determine how much you will pay from your returns to the fund for operating your portfolio.

VGT has the advantage in expense ratio with 0.10% compared to an expense ratio of 0.20% for QQQ. When comparing Vanguard ETFs with other companies offering, they typically have the advantage in terms of expense ratio, which is also true here.

While the number seems small when you look at both numbers, the difference is quite significant since QQQ’s expense ratio is twice that of VGT.

As an investor, if you want to pay the lowest fees possible, then VGT is a better option.

 

Trading and Liquidity – Tie

Both QQQ and VGT have the same trading and liquidity characteristics since they are both ETFs.

As ETFs, you can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV).

This benefit of ETFs doesn’t come without drawbacks, though – given that ETFs can trade throughout the day, they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.

ETFs offer an advantage to investors who trade daily or change positions frequently. Since they can trade throughout the day, whereas mutual funds, you have to wait until the day is closed.

 

Tax Efficiency – Tie

When comparing two different investment options, it’s important to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a huge impact on which investment generates higher after-tax returns.

Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund.

Since both VGT and QQQ are ETFs, they offer the same tax advantages and efficiencies.

It’s important to consider that VGT generates a higher dividend yield. This means that VGT will generate higher annual distributions and the accompanying higher tax burden as well. You should only consider this if you will be holding VGT or QQQ in a taxed account. Otherwise, in a tax-advantaged account, these differences are eliminated.

 

Tax Loss Harvesting – Tie

As ETFs, both VGT and QQQ have the same rules and regulations.

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts. While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.

When you sell an ETF, you’ll have to wait for the funds to settle before reinvesting the proceeds. You may have to wait one or two days before you have access to the funds, commonly called T+2.

 

Performance & Dividends – VGT

Let’s examine how QQQ and VGT differ in terms of performance and dividends.

The table below shows the total return for each ETF.

Total Returns by NAV
YearVGTQQQDifference
2022-29.67%-32.58%2.91%
202130.38%27.42%2.96%
202045.94%48.62%-2.68%
201948.68%38.96%9.72%
20182.52%-0.12%2.64%
201737.07%32.66%4.41%
201613.73%7.10%6.63%
20155.02%9.45%-4.43%
201418.01%19.18%-1.17%

Overall, VGT has the advantage in total annual returns compared to QQQ with a consistent outperformance.

Specifically, VGT has outperformed QQQ in six of the last nine years with an average return of 4.88%. However, note that over the last 3 years, the performance of these funds has been within 3% of one another.

Next, let’s examine the dividend yield performance of VGT and QQQ using the table below.

YearVGTQQQDifference
20230.76%0.64%0.12%
20220.82%0.60%0.22%
20210.70%0.50%0.20%
20201.06%0.66%0.40%
20191.17%0.80%0.37%
20180.96%0.77%0.19%
20171.10%0.91%0.19%
20161.56%1.07%0.49%
20151.33%1.11%0.22%
20140.99%1.34%-0.35%
20130.99%1.14%-0.15%

As demonstrated, VGT has outperformed QQQ in the last nine years. On average, VGT has a 0.27% higher dividend yield than QQQ.

Note that the difference in dividend yield is minor. Also,  differences in performance over the last three years have decreased. From 2021 to 2023, the difference in performance is 0.18%, while the difference between 2015 and 2022 is 0.31%.

Overall, VGT has the advantage in both total annual returns and dividend yield.

 

VGT vs QQQ: Who Should Invest?

VGT and QQQ are similar ETFs that invest a high proportion in the information technology sector. While VGT has a significantly higher proportion since it uses an information technology index, it is less diversified than QQQ.

Both these ETFs are highly dependent on the performance of the information technology sector. If you believe information technology will outperform all other sectors and are willing to take that risk, VGT might be your better option. If you want to have some additional diversification among other sectors and stocks, then QQQ might be the right option for you.

Another important consideration is the expense ratio. Vanguard offerings are nearly unbeatable in their expense ratios. QQQs expense ratio is 2x higher than VGT. As a result, this difference in expenses can have an impact on long-term investors and significant investment amounts. VGT is the better option if you want to minimize your expenses.

Finally, in terms of performance, VGT has an advantage in both total returns and dividend yield. VGT has shown consistent outperformance of QQQ. The difference in total annual returns and dividend yield is significant.

With that said, the performance trends for both total returns and dividend yield show the difference in performance decreases. In particular, the performance of QQQ over the last three years has improved and diminished the differences.

Overall, VGT is the better investment option if you are willing to invest a slightly higher proportion in the information technology sector. Otherwise, if you prefer to be more diversified for slightly lower returns and dividends, then QQQ is the better option.

 



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